New norms may hit India Inc's valuations

from direct loss in business, companies also suffer from a loss in intangibles like R&D, intellectual property, loyal customers and customer relations. The modern accounting norms also find it impossible to value such items.

“It’s high-time people realise that valuation of companies have shifted out of the tangibles. Testing the valuation of intangibles is different under IFRS-3. Even Western companies are grappling with the concept and it’s already showing in the way Vodafone wrote down the valuation of its Indian subsidiary,” said Unni Krishnan, MD of Brand Finance, a brand evaluation consultancy.

While Indian accounting norms have also pressed for reporting such impairment, many Indian companies typically took refuge under a small provision in the Companies Act that allows such change in valuations to be adjusted against Reserves. “Also, boards of many companies need to take a call on whether any drop in valuations is typical to that industry,” said KH Viswanathan, an executive director with audit firm RSM Astute.

“If the steel industry, which is a cyclical sector, is going through a low phase, that factor needs to be considered before making any impairment. Such calls are also made by an independent expert,” he said. Aditya Birla group’s Hindalco, that made a big ticket acquisition in 2007 by buying Canada-based Novelis for $6 billion, faced similar prospects when the recession compounded the slowing market situation and exposed a faulty price ceiling contract. This forced Novelis to sell its final products to a select customer at a lower price.

The contract, which existed for three years, affected Novelis’s profitability. In February last year, Novelis posted a net loss of $1.8 billion for the December quarter of 2008 due to asset impairment charge and derivative losses. While the Canadian company has since completed the restrictive price ceiling contract tenure, a Hindalco official said that they are continuing with the audit procedure and can’t comment any further. Hindalco is scheduled to announce its earnings on June 4.

A Novelis statement said: “In accordance with FASB 142 (Financial Accounting Standards Board), we evaluate the carrying value of goodwill for potential impairment annually during the fourth quarter of each fiscal year or on an interim basis if an event occurs or circumstances change that indicate that the fair value of a reporting unit is likely to be below its carrying value.”

The company said that no additional impairment was identified at March 31, 2009, nor in the nine months ended December 31, 2009.

Shareholders and investors in Indian companies are yet to know that there are differences between IFRS and Indian accounting norms. The Indian norms permit reversal of impairment of goodwill when certain conditions are met. This is not there under IFRS. There is also a difference in the types of assets to be tested, with the Indian GAAP including all intangible assets with a useful life of more than 10 years. Under IFRS, only intangible assets with indefinite useful life are taken. However, it also needs to be mentioned that impairment charges don’t necessarily mean a cash drain. It’s only a fallout of stringent accounting rules, say auditors.